On the Pricing of Performance Sensitive Debt
AbstractPerformance sensitive debt (PSD) contracts link a loan's interest rate to a measure of the borrower's credit relevant performance, e.g., if the borrower becomes less credit worthy, the interest rate increases according to a predetermined schedule. We derive and empirically test a pricing model for PSD contracts and find that interest increasing contracts are priced reflecting a substantial risk of shocks to borrower credit quality. Borrowers using such contracts are of an overall higher credit quality compared to borrowers using interest decreasing contracts. These contracts are priced as if no risk of shocks to borrower credit quality is present.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2011/5.
Length: 69 pages
Date of creation: 31 Mar 2011
Date of revision: 07 May 2012
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Performance sensitive debt; cash flow ratios; credit ratings;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- von Thadden, Ernst-Ludwig, 2004.
"Asymmetric information, bank lending and implicit contracts: the winner's curse,"
Finance Research Letters, Elsevier,
Elsevier, vol. 1(1), pages 11-23, March.
- Ernst-Ludwig VON THADDEN, 1998. "Asymmetric Information, Bank Lending and Implicit Contracts : The Winner's Curse," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP), UniversitÃ© de Lausanne, FacultÃ© des HEC, DEEP 9809, UniversitÃ© de Lausanne, FacultÃ© des HEC, DEEP.
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